<p>In this unsurpassed crisis, most industries are clear losers, although a few selected names have had upward traits. But social media falls into a unique middle ground. On the one hand, companies like Twitter (NYSE: TWTR) have suddenly become even more relevant and offer important news from the ground up, often in real time. But translating this user base into revenue has always been a challenge. That challenge will be even more pronounced, which is why the Twitter share has declined and flowed into the company’s earnings report for the first quarter.
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In all other circumstances, an increase in the number of users and commitment would be sufficient to justify taking a risk. After all, social media like dating is a number game: go through enough rejections and chances are you will eventually hit a yes. But for Twitter layers, just attraction does not cut it. You can have all the views in the world, but if it does not translate into revenue growth, TWTR is dead in the water.
If that was not bad enough, management withdraws its revenue and profit forecast for the first quarter at the end of last month. At the time, the lead group expressed concern that the new coronavirus would adversely affect advertisers’ demand. Now these fears come to life in the worst possible way.
Before the pandemic, eMarketer expected the digital advertising market to exceed $ 150 billion, and retail represented the best spending category. Other forecast large spenders included commercial aircraft and entertainment. If you look at the share price development of United Airlines (NASDAQ: UAL) or Cinemark (NYSE: CNK), you can see that 2020 will probably not match previous expectations.
A Critical Test Ahead for Twitter Stock
On paper, analysts expect consensus earnings per share of 10 cents. Individual estimates range from a penny to 15 cents. During the quarter last year, Twitter delivered EPS at 37 cents and hit the 15 percent consensus target.
For revenue, analysts forecast $ 788.9 million, with individual estimates between $ 668.9 million and $ 882.7 million. During the first quarter of 2019, the social media company had sales of $ 787 million.
An important reason why Snap jumped higher after the Q1 report was its huge sales growth, which increased more than 44% compared to the year before. In addition, global daily active users increased by 20% from the same period last year to 229 million. If Twitter shares are to replicate that enthusiasm, the underlying company must bring similar metrics.
Understandably, this will be a huge challenge. It’s no secret that when times get tough, many companies reduce their advertising costs and / or lay off their marketing team. As I suggested earlier, investors should not expect dealers and commercial aircraft to jump right when the economy reopens.
As this is a health-related crisis, most people are simply unwilling to venture out unnecessarily. According to a Reuters report, 72% of US adults support on-site protection initiatives until medical experts agree.
But a significant tailwind on Twitter is creating the massive increase towards digital platforms. For example, Netflix (NASDAQ: NFLX) shares soared due to people being forced to stay at home.
And in this digitalized economy, companies can not afford not to advertise. For wise, knowledgeable entrepreneurs, the coronavirus is an opportunity for life. As an example, personal protective equipment was never high on most consumers’ priority list. Now these products represent some of the hottest items.
I think most companies recognize this, why you do not want to be too negative on the Twitter share.
Take the moderate method
Of course, the winning season always has an element of volatility and risk. With the Covid-19 pandemic, this has never been truer. Thus, the optimistic point of view for TWTR is not unreasonable, but you do not want to expose yourself too much.
There is no doubt that advertising for many retailers and the entire travel industry will largely be a non-productive expense. In my opinion, health problems will take a long time for society to get over.
On the other hand, companies can not afford not to spend on advertising initiatives. If any organization wanted to make an impact, this will be the time to do so. Everyone is at home and they are undoubtedly more receptive to new ideas and concepts.
Therefore, if you are bullish on Twitter shares, I would take a small position as a “just in case” acquisition. But I would really like to see the Q1 numbers before I get too involved.
Josh Enomoto, a former senior business analyst at Sony Electronics, has helped broker larger contracts with Fortune Global 500 companies. In recent years, he has delivered unique, critical insights for the investment markets, as well as for various other industries, including law, construction management and healthcare. At the time of writing, he had no position in any of the above-mentioned securities.